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TMI Blog2012 (8) TMI 522X X X X Extracts X X X X X X X X Extracts X X X X ..... l be difficult to believe that assessee had indulged in a pricing methodology to benefit its AEs with regard to purchase of material falling in six item codes - to take 6 items from a pack of 35 and consider only these six items for making a revision of ALP will not give a fair result at all - TPO and AO stepped into the shoes of the assessee to decide on which of the items, it should pay more and in which items it had paid more, ignoring those items on which it had paid less - since number of items on which revision of ALP has been done is insignificant when compared to the total number of purchases and total volume of international transactions addition on account of revision in ALP was not called for and addition stand deleted - in favour of assessee. Exclusion of telecommunication and foreign currency expenses from export turnover - Held that:- As decided in Income-Tax Officer Versus Sak Soft Limited [2009 (3) TMI 243 - ITAT MADRAS-D] calculation of deduction u/s 10B calls for excluding from export turnover, freight, telecommunication charges and expenses incurred in foreign exchange - in favour of assessee. - IT APPEAL NOS. 2116 (MDS.) OF 2010 & 2108 (MDS.) OF 2011 - - - D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, a mere error in mentioning DRP instead of Assessing Officer in the grounds of appeal would not by itself make the appeal defective, when otherwise the grounds clearly bring out the grievances of the assessee. We, therefore, reject the preliminary objection raised by the Revenue and proceed to adjudicate the appeals. 6. Since facts are common for both the years except for differing figures, those for assessment year 2006-07 are only discussed. 7. Assessee engaged in the manufacture of lingerie for women, had filed returns for the respective assessment years claiming deduction under section 10B of the Act. Such deduction claimed for assessment year 2006-07 was Rs. 48,19,56,290/-, whereas it was Rs. 55,63,49,731/- for assessment year 2007-08. During the course of assessment proceedings it was noted by the Assessing Officer that assessee had various international transactions with Associated Enterprises (AEs in short). Accordingly he made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO in short) for determination of arms' length price relating to international transactions entered by the assessee with its AEs. The TPO in turn required the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Communication 7253 Unichela (Pvt) Ltd. Staff Training Expenses 22270 Courtaulds Clothing Lanka Pvt. Ltd. Foreign Travel 10014 Staff Training Expenses 3059 MAS Intimates (Pvt) Ltd Foreign Travel 15294 Triumph International Overseas Ltd. Vaduz Agency Commission paid 99148076 Foreign Travel 819019 TOTAL 2272445430 Assessee had adopted CUP method for ascertaining the arms' length price and justifying its various international transactions. TPO noted from the item-wise comparative table given by the assessee that certain materials were purchased from an AE called Triumph International Spiesshofer Braun (TI-Sub) ("TIB" in short). As per the TPO there were certain differences in price between similar items purchased by the assessee from non-AEs and AEs. The price at which purchases were effected from M/s. TIB were substantially higher than the price at which similar items were purchased from non-AEs for certain items. The list prepared by the TPO where such excesses were noted is given here under:- Item Code ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had purchased 35 different items from the same AE during the relevant previous year and the difference in prices which gave advantage to the AE were only in six instances. Further, as per the TPO the excess stock resulting due to procurement if effected from non-AEs, could have been sold in the domestic market and there was no chance of a stock pile up. As per the TPO the products manufactured by the assessee were not bio degradable and was not influenced by change in fashions since TIB, the company to whom the assessee was effecting its sales was a leading company in lingerie business. Based on these reasons, the TPO concluded that arms' length price for the purchases effected from AEs in respect of the six items had to be reduced by a sum of Rs. 60,43,329.25. Assessing Officer, based on the TPO's direction proceeded to prepare a draft assessment order wherein he proposed to make an addition of Rs. 60,43,329/- to its returned income. 10. From the computation of income filed by the assessee, Assessing Officer also noted that it had not excluded from export turnover items like freight, telecommunication or insurance attributable to delivery of articles and things outside I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not form part of the billing done by the assessee, had to be excluded from export turnover for working out deduction under section 10B of the Act. 13. In other words, DRP approved the draft assessment order proposed by the Assessing Officer on both the counts, for both the years. Accordingly, Assessing Officer completed the assessment making addition for revision in ALP and excluding certain items of expenses from export turnover for the purpose of working out deduction under section 10B of the Act. 14. Now, before us, learned A.R. strongly assailing the order on both the above aspects submitted that neither the DRP nor TPO considered the international transactions entered by the assessee during the relevant previous years in the correct perspective. According to him, the international transactions with AEs for assessment year 2006-07 came to Rs. 227.24 crores. Such transactions included sales to AE coming to Rs. 198.33 crores. Even as per Assessing Officer purchases were made from AEs other than M/s. TIB. TPO as well as DRP fell in error in selecting six items from a large number of purchases and making a comparison of such six items for carrying out an adjustment to ALP, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit, whereas the average sale price of the assessee to its AEs was 7.84 US$ per unit. This by itself clearly demonstrated that assessee was not indulging in any under-hand dealings for inflating or deflating price for the advantage of AEs. For the proposition that global view has to be taken when there are number of transactions with AEs, A.R. relied on the decision of co-ordinate Bench of this Tribunal in the case of Mainetti India (P.) Ltd. v. Asstt. CIT [2012] 22 taxmann.com 236 (chennai). 15. In so far as exemption under section 10B is concerned, the A.R. submitted that if the items were excluded from export turnover, necessarily it had to be excluded from total turnover also. For this, he relied on the Special Bench decision in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 (Chennai). 16. Per contra, learned D.R. submitted that assessee's submission regarding orders placed being small in numbers were ill-founded. Relying on the annexure filed by the assessee along with its written submissions, learned D.R. submitted that there were many number of orders where quantities were not that small, as projected by the assessee. As for the claim of assessee that sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no ALP revision was recommended in such items. Leaving alone the claim of the assessee that there were minimum order quantity restrictions with non-AEs, which rendered the prices paid by it to AEs, uncomparable with the prices paid to AEs, undisputed fact here is that assessee had substantial volume of international transactions with its AEs. Assessee as per the finding of the TPO herself was a company held by three other companies namely MAS Capital Pvt. Ltd., Triumph International Overseas Ltd. and MAST Industries Inc. USA. TPO has also given a finding that Triumph International was responsible for designs and styles whereas MAST Industries were purchasing almost all the production of the assessee. Thus, AEs of the assessee was giving the designs, placing orders supplying raw materials substantially and finally purchasing its products. In such a scenario, if assessee had an intention to price its products and purchases so as to give undue benefits to the AEs outside India then it could have done so in other voluminous transactions it entered with the AEs. List of AEs and the transactions entered with such AEs are given at para 7 above. Out of Rs. 227.244 crores worth transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of transaction or class of transaction or class of associated persons or functions performed by such persons". The term 'class of transaction' and 'nature of transactions' come to the forefront in the present case. In the assessee's case, the transaction with the AE is not one of simple purchase or simple sale. The assessee purchases from one and sells to another. The assessee has purchased from its AE in Hongkong, Srilanka, Malayasia, Pakistan and RANDY Asia and has sold to its AE in Srilanka, Korea, Hongkong, Gulf, Egypt, Bangladesh,Malayasia, Taiwan, UK and Pakistan. In regard to the sales made by the assessee, the transaction with Bangaladesh is in positive, the transaction with Egypt is in negative, the transaction with Gulf is in the positive, the transaction with Hongkong is in negative, the transaction with Korea is in positive, the transaction with Srilanka is in the negative, the transaction with Malayasia is in the negative, the transaction with Pakistan is in the negative, the transaction with Taiwan is in the negative and the transaction with UK is in the negative. Thus, what is noticed is that on the purchase the assessee has a positive differential i.e. th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itive i.e. Rs. 15/- is lower than Rs. 17/-. Therefore, Rs. 17/- will be considered as ALP. This would result in (i) The assessee buys from the AE at Rs. 10/- (ii) The assessee's sale price is adjusted to ALP at Rs. 17/-. Thus the profit of the assessee will be determined at Rs 7/-. Now if we compare the profitability, assessee's purchase and sale to AE is Rs. 5/- Percentage of profit 5 100 = 33.33% 15 Non-AE purchase sale is Rs. 5/- Percentage of profit 5 100 = 29.41% 17 After adjustment profit is Rs 7/- Percentage of profit 7 100 = 41.17% 17 Thus the profitability if considered without considering the positive deviations would lead to impossible profitability positions, which is not what is contemplated under the provisions of 92C. In the circumstances, the Assessing Officer is directed to re-compute the ALP by taking into consideration both the net difference on the sale from the AE and purchase from the AE. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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